Founderitis: Black Hats versus White Hats

Today, I will expand on an offhand comment I made last week about founderitis being one of the biggest barriers to engagement with the Grover Playbook and, incidentally, probably the number one showstopper for investment we encounter at Verdexus.

As a serial entreprenur, (ex-)founder and investor in technology startups, I have seen more than my share of experiences showing how fraught founder interactions can be. My friend J Paul Haynes, who is a serial executive (and founder), showed me an interesting article from the February 2008 issue of Harvard Business Review on this topic entitled “The Founder’s Dilemma”. In this article, Noam Wasserman analyzed 212 startups and observed some intriguing patterns. What is great about this article is that it provides a cold, analytic economic framework to assess the “founder’s dilemma” which is the “… choice between making money and controlling the business.” The Faustian bargain to give up equity and control in order to attract institutional (venture) capital that will grow the business faster is a hard one for many founders to accept. And yet, the leverage of external capital and talent typically goes hand in hand with technology startups.

Wasserman goes on to show that founders, who want to retain control, often choose (or are forced to accept) slower growth and less chance of making money in a “home run” exit. Conversely, the study almost paints a picture of the inevitability of founders being pushed out by investors. For most founders, it makes grim reading, while most VCs would simply nod knowingly at the picture of founder limitations. After all, many of those terms in the much vaunted VC term sheets (now often term books!) evolved precisely as defensive artillery trained on errant founders. The article’s implication that the half life of the CEO tenure founders is short, will make difficult reading for most founders.

Perhaps it is difficult for founders to excel at both and so they “… end up being neither rich nor king”, but I would hope to see less of a zero sum game and more scope for personal growth. Personally, I find most founders I encounter to be smart and compelling individuals. Of course, I’ve also seen many of the counterproductive traits and habits that the VCs pejoratively label “founderitis”. On balance, I’m mostly on the side of founders in this classic standoff between the “black hats” (VCs) and “white hats” (founders). Having said that, I’ve also founders pull some appalling stupid and counterproductive moves in my time.

Since most founders are super smart and highly motivated individuals, with better mentoring, role models and better expectation setting by all parties, I would like to believe that more founders could better integrate the “rich” and “king” parts. In other words, I would hope to see more founders figure out how to increase their management and team playing skills, while also building value in their businesses.

As I mentioned, I think founders are, as a whole, a creative, exciting and group worth celebrating. Therefore, to balance Wasserman’s HBR research, I’d encourage everyone to read the remarkable 2007 book Founders at Work by Jessica Livingston. In it, she endeavoured to analyze founders by interviewing 32 founders from the 1980’s and onward, from hardware, to software, to Web 2.0 she has deduced some interesting patterns of founders:

Tenacity: many technical founders had a burning passion that defied logic or “expert” advice until, of course, the idea caught on big time.

Listening to the market: PayPal told their early eBay customers to “go away” so they could focus on mobile payments, before they realized that their real business was serving those annoying PayPal transactions.

Distrust: a single event, early in the history of Apple, poisoned relations between Steve Wozniak and Steve Jobs and was perhaps never recoverable.

While it is easy to imagine the “blindspots” and self promotion inherent in interviews with founders, the sheer number of founders that Ms. Livingston interviewed helps to mitigate this concern over a wide range of time and types of technology businesses. And, for those who think the MBAs and marketers rule the world, it is refreshing to see the Silicon Valley model of very strong technical founders celebrated.

So, here’s to those remarkable individuals, the entrepreneurs founders who have the courage and tenacity to start business. For all their shortcomings and big egos, we do need to celebrate their important role in venture creation.

About Randall

Randall Howard is a serial entrepreneur and long term technologist with a passion for social innovation.